It's Preseason

Are you a football fan? If so, you will appreciate this (especially coming from someone in Detroit). If not, ask someone who is to explain. Do you know any NFL teams that don’t participate in the preseason? No. They all take advantage of it. Why? They do it because they want to get themselves mentally, physically, psychologically and fundamentally prepared for the regular season.

So, what does this have to do with the car business and special finance? Ladies and gentlemen, we are in the preseason of the special finance game. When the financing situation loosens up, the regular season will be here. To quit now or get out of the business makes no sense. Sure, grosses are down 20 to 25 percent, getting deals done is much tougher and we all hate taking $1,200 deals, but this is the reality of the business. We have no option but to continue to fight.

There are many dealers out there who continue to serve the subprime market and make good money doing it. They have made a conscious decision to continue fighting and overcoming the obstacles in front of them. Anyone out there who does not see the opportunity or the sobering fact that a subprime customer base is here to stay (and will do nothing but increase in our lifetime) is simply not facing reality. Don’t take my word for it; take a look at the Experian Automotive report, “Riding out the storm, An inside look at credit, risk and delinquency: implementing winning auto-lending strategies.”

In reading the piece, I noted the following trends:

1. Finance companies’ market share of total loans is increasing.

2. Bank and finance company originations of nonprime-and-below loans are increasing.

3. Nonprime, subprime and below subprime percentages of loans were 43.5 percent of the total outstanding loans.

4. If you consider only 30 percent of the nonprime loans along with the subprime and below subprime, 33 percent of the loans would fall into the category of not being able to be financed through a traditional finance source. If you include this 33 percent along with the people financing through buy here pay here (BHPH) dealerships, over 45 percent of the car-buying public cannot finance a vehicle through traditional finance sources. If you then add all the people who could not obtain financing, that number easily exceeds 50 percent.

5. The number of open prime automotive loans is falling.

6. Total originations are down.

7. Finance companies experienced the lowest increase in delinquencies when compared to banks, credit unions and captive finance companies, which tells me finance companies’ models and historical lending practices aren’t as broken as some might conclude.

The Experian report validates what we have said for sometime—subprime automotive lending will grow and is here to stay. In addition, the number of dealers choosing to serve these customers has declined. This spells nothing but opportunity for those dealers still in the subprime business.
 
The lending environment will loosen up for two reasons: 1) the finance companies’ lending models are solid, as evidenced by the reasonable delinquency rates; and 2) capital availability will turn around as banks gain liquidity. In the past few months we have seen the United States and other world powers announce their investment into large banks and the loosening of the commercial paper market. We are not feeling the effects of this yet, but this money has to find its way to consumers or the economy will come to a screeching halt.

The Federal Reserve, the Treasury, Congress and the President will not let this happen. The economy and banks can’t ignore 50 percent of the buying public and, therefore, will figure out a way to lend money to these consumers and make money in the process. Given these factors, dealers serving subprime customers will be big winners. The time is now for dealers to prepare themselves for the time when finance companies have more money available and start serving the over 50 percent of car buyers who can’t get conventional credit.

Successful dealers no longer depend on three to five finance companies to fund 80 percent of their deals. They now scatter 80 percent of their deals over 10 to 15 finance companies. Sure, their grosses are down, but they have chosen to fight and continue to advertise to get people into the store. They have also recommitted themselves to ensuring that they have the finance companies, inventory, processes, traffic and commitment it takes to be successful.

I must give credit to Norm Taylor who shared the sports analogy with me that kicked-off this article.